Low Cost Product Pricing Strategy
When setting prices for low cost items, do you apply the same margin as high cost items?
The price consultants
at PricePoint Partners
have come across many businesses that use a single margin across products with various cost levels. While this may be an easier approach, it’s important to consider that the cost to order the item, receive it, store it, sell, handle it and ship it may be the same for low cost items as high cost items. This tends to be particularly true for distributors.
The costs are about the same to inventory and handle an item whether it is an expensive product or an inexpensive subassembly or component. In order to maintain sufficient margins, low cost products should realize a higher margin percent. And, high cost items should realize a lower margin.
This will result in gross profit dollars that will vary significantly by product. But, in the end, you will see an overall improvement in margins.